In its bid to tame soaring inflation, the Central Bank of Nigeria (CBN), on Tuesday, raised the Monetary Policy Rate (MPR) from 13 per cent to 14 per cent.
This was even as it warned of further tightening if prices continue to rise. The MPR is the baseline interest rate in an economy while every other interest rate used within such an economy is built on it. CBN Governor and chairman of the MPC, Godwin Emefiele, disclosed this during the 286th meeting of the Monetary Policy Committee (MPC) in Lagos.
The committee also retained the asymmetric corridor at +100 and -700 basis points around the MPR, CRR at 27.5 per cent, and the liquidity ratio at 30 per cent.
Whilst noting that a previous 150 basis points rate hike in May had not permeated the economy enough to halt rising inflation, which stood at 18.6 per cent in June, its highest level in more than five years, Emefiele stated that the five year high jump and attendant low purchasing power of Nigerians were key to the MPC’s decision.
He revealed that all members of the MPC voted for rate raise, majority voted for a 100 basis points increase in their bid to provide necessary support to strengthen the nation’s fragile economy.
“Members were unanimous that given the aggressive increase in inflation, coupled with a result with negative consequences particularly from poor purchasing power as well as retarded growth, there is a need to continue to tighten. However, the policy dilemma was hinged around the level of tightening needed to rein in inflation without dumping in manufacturing or which could result from the higher cost of borrowing.
Aside from narrowing the negative real interest rate gap, members also believed that tightening will signal a strong determination of the bank to aggressively address its price stability mandate and portray the emphasis on sensitivity to the impact of inflation on the vulnerable households and the need to improve their disposable income”, Emefiele said.
Furthermore on inflation, the CBN Governor, said that there is a need to look at other economies while adding that inflation must be dealt with while the CBN use development finance tools to continue it’s push towards improved output growth.
He said: “ Inflation is a terrible scourge and so we need to do more work on inflation. As long as we see inflation at a level that deters growth, the MPC is very determined that if it continues, we would continue to tighten rate.”
Emefiele thereafter noted that the RT200 and 100 for 100 incentives have recorded gains in increasing foreign exchange inflows into the country. “We are making progress for the 100 for 100. I think we have disbursed slightly above N50 billion to the 100 for 100 which is meant to really drive support for those who want to produce goods that can be exported out of the country to earn dollar revenues.”
“Indeed, we are delighted that the race to $200 billion is yielding good results, the RT 200. We found out that we had received inflows as at June this year over $2.9 billion. This is because whereas we found out that yes there has been a lot of exports but those exports that were found to be eligible for the rebates were in the tune of over $600 million and that is the reason, we are paying slightly over N20 billion for Q2.”
Reacting to the MPC’s decision, the Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, said that the tightening will only worsen the plight of entrepreneurs or those in production in the economy.
“Because many of them are indebted to the bank, it will mean they will review the credit and so it will go higher for those investors and it is not going to have an impact on inflation.
This economy is not a credit driven economy and there is no way you can use monetary policy issues to solve these challenges and so what they have done is create problems for investors who are battling with exchange rate, high cost of diesels, scarcity of FX, purchasing power among others. I do not think this is good for the economy. We need to fix our refineries and address the FX challenges”. Members of the organised private sector have decried the move, saying it will lead to rising cost of manufacturing inputs, which will naturally translate to higher prices of goods, low sales, less credit to the private sector, reduced investment, constrained production in the economy, at least in the short term and adverse effects on the equities market.